Banks were hammered by the effects of COVID-19 early on in the crisis. The big players, like Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C), all saw shares fall by as much as 50% from pre-COVID-19 levels.
Some, like Wells Fargo (NYSE: WFC), dropped even more.
The Fed forced them to tighten their belt, cut, reduce or limit their dividends, stop share buybacks, and use very stringent lending standards.
They’re not out of the woods yet, but the sector is much healthier than it was six months ago.
This improvement can be seen in several ways…
- Deposits are increasing.
- Loan losses are moderating and reserving less quarter over quarter.
- Banks are buying back their own shares again as the Fed recognizes that the trillions in stimulus checks have benefited them by reducing loan losses.
In fact, many banks should begin to claw back the money they set aside, which will show up in their earnings reports.
So which bank should you buy?
My pick is Wells Fargo, but with a few conditions…
- Buy the first half on a pullback to less than $30 per share – which shares currently trade right above.
- Add the second half at $28 or less to make up a full position.
Wells Fargo became the poster child for “bad banks” after it was accused of falsifying new customer accounts.
After all of that, Wells Fargo shares are now the cheapest of all the major banks based on book value.
And the company still maintains a huge base of deposits, more than $1 trillion, and the ability to benefit from an upward-trending economic cycle.
I believe we will see a much better 2021.
Trillions in stimulus, vaccines, consumer optimism and rising interest rates are all great news for banks.
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Source: Wealthy Retirement